Concerns about inflation, rates and the economy have unnerved the stock market, which had been holding up rather well.JONATHAN HAYWARD/The Canadian Press
As a plague, inflation is not in COVID-19’s league.
But it’s closer than you think, especially in the fall of 2023. Worries that global inflation is entrenched have slammed the bond and stock markets in ways that directly affect your financial well-being.
Anyone renewing a mortgage is caught in the latest financial market developments. Borrowers of all types have reason to be concerned, as do retirees and people close to retirement. So do people who job-hopped in the past year or two and sit at the bottom of company seniority lists.
Inflation is the driver of all of this. Unless it backs off soon, we are in for the toughest phase yet in the economic and financial developments triggered by the pandemic. Rising oil prices only add to the potential for inflation to hang tough.
The bond market is a trading arena for debt issued by governments and companies, but it’s also a handy way to measure sentiment in financial markets about inflation, interest rates and the economy. Sentiment now is bad, so bond prices are falling and bond interest rates are rising. The two move oppositely.
Government bond yields set the trend for rates on fixed-term mortgages. Planning to buy a home or renew a mortgage with a fixed term in the next few months? Ask lenders for a rate hold right now. Like, today.
Borrowing costs on variable-rate mortgages are driven by the Bank of Canada’s overnight rate, which can be adjusted on Oct. 25 and Dec. 6. No one, including the bank, wants higher rates because the economy is weakening and the stress on indebted households is intense. But higher rates are the bank’s best weapon against inflation.
Variable-rate mortgages turned toxic when interest rates started to rise last year. Now, people are starting to consider them again because of a sense we may be near the peak for interest rates.
What’s happening in the bond market tells us there is no consensus that the next move on rates will be down. If you choose a variable-rate mortgage, be open to the possibility that your costs could rise before they fall.
Concerns about inflation, rates and the economy have unnerved the stock market, which had been holding up rather well. Some of the worst carnage in the stock market has affected a wide selection of beloved blue-chip dividend stocks.
Yields on stocks like TC Energy Corp. TRP-T, Enbridge Inc. ENB-T, BCE Inc. BCE-T and Bank of Nova Scotia BNS-T are in the 6 to 8 per cent range, which is exceptional. My colleague Tim Shufelt offered some helpful perspective on the importance of dividends in a recent story. Now may be a time to buy more of these or other beaten down stocks.
Now is not the time to start selling stocks to avoid what could turn out to be a serious market pullback. It’s tempting to pro-actively dump stocks, particularly if you’re retired or looking ahead to that milestone. But when investors try to outsmart the market, they usually fail. Well-chosen investments and portfolios should be able to handle what’s coming.
The high interest rates that result from inflation have also increased the chance of a recession. In fact, we may already be approaching that point. While the job market remains in good shape, there’s a sense of momentum reverting back to employers and away from job seekers.
Your biggest personal finance risk right now could be your job. Take a cold-eyed look at your employer’s financial health and assess the risk of layoffs or reduced work hours. Your best defence against job uncertainty is cash in the bank earning interest at today’s elevated rates.
Finally, it’s time for a rethink of a spending phenomenon that began with the lifting of pandemic lockdowns. Splurging on “experiences” like travel and concerts must bow to financial reality, which means you should avoid going into debt or depleting your emergency savings.
Inflation will eventually crack. But if financial markets are right in their thinking as the final quarter of 2023 begins, it’s going to take longer than we thought to happen. Prepare for some hard days ahead.
Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.
